Changes to the Federal Housing Administration streamlined refinance process is expected to benefit homeowners with a mortgage originated before June 2009.
However, an analyst at the Royal Bank of Scotland warns that the Department of Housing and Urban Development will likely increase its indemnification demands for lenders that, it feels, wrongfully wrote the new mortgage.
"We expect HUD to be more active in seeking claims for fraud," said mortgage securities analyst Jeana Curro in an email to clients, "while HUD has always had indemnification rules in place, it has made few claims in the past."
Curro adds the statute of limitations for indemnification is five years, and it generally takes around one year for the insurance claim to get paid after a foreclosure. Consequently, lenders could be dis-incentivized to refi anything originated before 2008, since doing so would “restart the clock” on the statue of limitations.
"HUD strengthened and standardized its lender indemnification requirements, effective Feb. 24, 2012," Curro adds. "Specifically HUD will demand indemnification for an insurance claim if the mortgagee lender “knew or should have known” that fraud or misrepresentation was involved and lenders will no longer be able to negotiate claims.
Curro concludes that refinancings will be concentrated in mortgages originated between the two mentioned timeframes, after 2007 and before June 2009. Therefore, prepayment risk will changes for those mortgages wrapped into Ginnie Mae bonds.
"We expect 2008 to 2009 higher coupons to be the most negatively impacted, while lower coupons and post June-2009 endorsements may actually benefit," from the changes, Curro said.
The changes to the FHA streamline allow the borrower to pay 55 basis points in annual mortgage insurance premium on the refinancing down from the 120 to 150 bps. The upfront mortgage insurance premium is also nearly eliminate for mortgages that qualify.